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Kuwaiti banks may put aside the most money for bad loans among Gulf lenders this year as companies restructure debt.
Provisions as a percentage of total loans at banks in the country will reach 5.6% this year and 6.7% in 2013, according to Dubai-based investment bank Arqaam Capital. That compares with 5.5% and 6.5% respectively for lenders based in the United Arab Emirates, it said.
Some Kuwaiti companies, including Global Investment House, have defaulted since the onset of the global financial crisis after the value of their assets collapsed and frozen credit markets prevented them from raising new loans. The average yield on Kuwaiti debt was 5.28% yesterday, JPMorgan Chase & Co’s CEMBI Broad Kuwait Blended Yield index shows. That’s above 1.92% in Saudi Arabia, 3.75% in the United Arab Emirates and 2.86% in Qatar.
“The Kuwaiti banking sector is still grappling with the aftermath of the crisis,” said Jaap Meijer, director of equity research at Arqaam by e-mail. “Debt restructurings, excessive exposure to investment companies, high corporate leverage and a structural political gridlock are stifling growth and continue to cause delays in the implementation of economic policy, causing Kuwait to lag the region.”
Total debt for the 95 investment companies in Kuwait, the Organisation of Petroleum Exporting Countries’ fourth-biggest oil producer, amounted to 4.4bn dinars ($15.6bn) at the end of October, according to Bloomberg calculations based on central bank data.
National Bank of Kuwait, the country’s biggest lender, increased money aside for loan losses almost fivefold in the third quarter from the year earlier to 54mn dinars, according to data compiled by Bloomberg. That’s the biggest increase among the five-biggest publicly traded banks by assets in the Middle East. The lender’s shares have fallen 3.8% this year, compared with a 1.6% gain for the main index.
National Bank of Abu Dhabi increased provisions by $12.6mn to $99.9mn, while Al-Rajhi Bank raised them by $112.3mn to $221.24mn. Qatar National Bank and Emirates NBD lowered them.
The ratio of bad debt to gross loans at Kuwaiti banks will remain at 7.5% for the third consecutive year in 2013, HSBC Holdings, Europe’s biggest bank, said in an October report. That compares with an estimated 3% in Abu Dhabi, 1.5% in Qatar and 1.6% in Saudi Arabia.
Global Investment House, a Kuwaiti investment bank, said in September its shareholders agreed to a second plan to restructure $1.7bn of debt. Aref Investment Group said last year it planned to sell some of its assets to restructure 280mn dinars of loans. Investment Dar, the majority owner of Aston Martin Lagonda, in 2011 restructured the terms on about $5bn of loans after defaulting in 2009.
“For 2013, a growth of 3 to 6% in new non- performing loans cannot be ruled out,” said Naveed Ahmed, a banking analyst at Kuwait-based Global Investment House, in an e-mailed response to questions on November 25. “This is because banks have already witnessed massive asset deterioration in previous years.”
Cabinet resignations and political clashes between the government and lawmakers have hindered Kuwait’s $110bn development plan to diversify away from oil. The government had planned to have private investors contribute almost half the cost for projects including a metro and rail network, expanding the airport, and constructing new power stations, hospitals, roads and a port.
Kuwait’s opposition and its supporters staged one of the biggest rallies in the Gulf nation’s history on November 30, urging a boycott of elections amid calls for the government, appointed by the ruling al-Sabah family, to share more power with elected politicians.
The country’s private-sector borrowing grew at the slowest pace in at least 17 years in 2011. The Central Bank of Kuwait cut the main interest rate in October by 50 basis points to 2% to spur growth.
“The operating environment continues to pose some barriers to our potential for growth,” National Bank of Kuwait chief executive officer Ibrahim Dabdoub said in a statement in October. “Government spending continues to be insufficient and the tendering of new projects has significantly lagged, leading to a stagnant stock market performance and dormancy in economic activity.”
While economic growth rebounded to 8.2% in 2011, it was the slowest among the six Gulf Co-operation Council countries over the previous five years. The International Monetary Fund forecasts economic growth will fall to 1.9% in 2013 from 6.3% this year, according to the organization’s World Economic Outlook released October 9.
“Political wrangling has been obstructing implementation of economic policy, and the government continues to miss its budgetary capital spending targets,” Stathis Kyriakides, a Cyprus-based analyst at Moody’s Investors Service, said in an e-mailed response to questions on November 20. “Lack of sufficient government spending has kept domestic credit conditions subdued.”
Banks in Kuwait are also paying more for provisions against bad loans. The country’s rated banks’ annualised credit costs in the first half were 1.8%, compared with 1.4% in the UAE, 0.7% for Saudi Arabia, 0.5% for Bahrain and 0.4% for Qatar and Oman, according to Moody’s.
“We foresee that lending growth for Kuwaiti banks will be very limited in 2013 because of political deadlock,” said Timucin Engin, a Dubai-based associate director at Standard & Poor’s. “In the absence of any significant prospect of lending growth, the key challenge for Kuwaiti banks is profitability and good margins.”